Estimating the Size of the Shadow Economy through Currency Demand: A Review of the Methodology with an Illustration for Argentina
Keywords:
shadow economy, currency demand, monetary method, income elasticity, ArgentinaAbstract
The “monetary method” to measure the size of the shadow economy is based on econometric estimates of the demand for currency. These estimates are used to reckon the currency held by economic agents in excess of the amount they need to finance registered transactions. This excess of currency multiplied by the income-velocity of circulation (assumed to be equal in the registered and the shadow economies) allows measuring unregistered GDP (the size of the shadow economy).This paper shows that the “monetary method” only produces appropriate estimates of the size of the shadow economy if the income-elasticity of the demand for currency is one. This result is applied, as an illustration, to an existent measurement of the size of the shadow economy in Argentina for the period 1930-1983.
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Copyright (c) 2003 Hildegart Ahumada, Alfredo Canavese, Paula Canavese, Facundo González Alvaredo
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